Good morning, ladies and gentlemen, and welcome to the Montrose Environmental Group, Inc. First Quarter 2024 Earnings Call. [Operator Instructions] This call is being recorded on Wednesday, May 8, 2024. I would now like to turn the conference over to Rodny Nacier, Investor Relations. Please go ahead.

Thank you, operator. Welcome to our first quarter '24 earnings call. Joining me on the call are Vijay Manthripragada, our President and Chief Executive Officer; and Allan Dicks, Chief Financial Officer. During our discussion today, we will be referring to our earnings presentation, which is available on the Investors section of the website. Our earnings release is also available on the website. Moving to Slide 2. I would like to remind everyone that today's call will include forward-looking statements that are subject to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Actual results may differ in a material way due to known and unknown risks and uncertainties that should be considered in evaluating our operating performance and financial outlook. We refer you to our recent SEC filings, including our Annual Report on Form 10-K for the fiscal year ended December 31, 2023, which identify the principal risks and uncertainties that could affect any forward-looking statements as well as future performance. We assume no obligation to update any forward-looking statements. In addition, we will be discussing or providing certain non-GAAP financial measures today, including consolidated adjusted EBITDA, adjusted net income and adjusted net income per share. We provide these non-GAAP results for informational purposes, and they should not be considered in isolation from the most directly comparable GAAP measures. Please see the appendix to the earnings presentation or our earnings release for a discussion of why we believe these non-GAAP measures are useful to investors, certain limitations of these measures, and a reconciliation thereof to their most directly comparable GAAP measure. With that, I would now like to turn the call over to Vijay beginning on Slide 4.

Thank you, Rodny, and welcome to all of you joining us today. I will provide you with business highlights. Allan will provide you with financial highlights. We will then open it up to Q&A. And I will speak generally to the updated earnings presentation shared on our website. We have had and continue to have a strong start to 2024. Our results are the byproduct of that momentum, and I want to start by acknowledging the exceptional efforts of our colleagues around the world. I would also like to remind our listeners that while we discuss quarterly results, our business is best assessed on an annual basis. Demand for environmental solutions does not consistently follow quarterly patterns, and we manage our operations on an annual basis. With that, let me start by highlighting a few key themes related to our first quarter 2024 results. First, we are seeing secular tailwinds and strong performance across our segments and service lines, resulting in record first quarter revenues and consolidated adjusted EBITDA. Second, our solid performance during the quarter is primarily attributable to strong organic growth. Our organic growth continues to be driven by cross-selling success and R&D successes. There were also a number of key regulatory updates from the U.S. EPA that present significant opportunities for our business. And those updates have increased our confidence about our future. I'll provide additional details on that shortly. Third, M&A remains a key component of our growth strategy and the cadence of opportunities has increased this year relative to our recent past. We are thrilled to welcome the teams from Epic, Two Dot and ETA. The addition of these teams brings stellar talent to Montrose. They also increase our geographic and service capabilities. We have a robust acquisition pipeline, and we expect continued M&A momentum…

Thanks, Vijay. Our strong results in the first quarter reflect the strength of our business, strong organic growth through our cross-selling strategy as well as the contribution of strategic acquisitions. In addition, we further strengthened our capacity for accretive growth through the successful completion of our follow-on equity offering in April. Moving to our revenue performance on Slide 9. We were happy to see continued strong organic growth across most of our service lines during the first quarter. Our first quarter revenues increased 18.2% to $155.3 million compared to the prior year quarter, primarily driven by strong organic revenue growth in our AP&R and M&A segments, and the contributions of acquisitions, partially offset by lower environmental emergency response service revenues, the exiting of a discontinued specialty lab in December 2023, and the shift away from lower margin revenue in our biogas business in the latter part of last year. Looking at our consolidated adjusted EBITDA performance on Slide 10. First quarter consolidated adjusted EBITDA was $16.9 million or 10.9% of revenue. This compares to consolidated adjusted EBITDA of $16.6 million or 12.6% of revenue in the prior year quarter. The increase in consolidated adjusted EBITDA was driven by higher revenues. Lower consolidated adjusted EBITDA as a percentage of revenues was primarily driven by seasonally low margins from Matrix, which we acquired in June 2023 and therefore was not included in the comparable prior year period. And to a lesser extent, a large, higher-margin environmental emergency response project in the prior year period, which did not occur in the first quarter of this year. Moving to a review of diluted adjusted net income per share on Slide 11. Adjusted net income per share was $0.16 for the first quarter compared to $0.17 in the prior year quarter. The decrease was mainly…

[Operator Instructions] Your first question is from Tim Mulrooney from William Blair.

Thanks for all the color with the recent finalization of the EPA's regs for MCLs and CERCLA. And I say, we appreciate all the color on the market sizing. But I wanted to ask about timing. How do you think about the near-term 1- to 2-year impact of these rulings as you think across all 3 of your separate business lines.

Yes, it's a good question, Tim. So if you step back, the regs are structured in a way where the implication for testing has a 3-year window, [Technical Difficulty] implication for treatment has a 5-year window. And so those are kind of the formal regulatory mandated time frames. But what we're seeing a fair amount of is activity that's picking up given our earlier conversations with you and others, in anticipation of these regs and in anticipation of needing to do some of the testing and remediation, knowing what existing PFAS levels are in various water matrices that a lot of our clients have been working on. And so the way I would think about it near term for Montrose is it will be a steady increase. We are seeing increased activity already on the testing and assessment side. And the cadence of inbounds on the treatment side has really picked up as well. And so we anticipate through the back half of this year and certainly next year, we'll start to see the visible momentum, meaning financially visible momentum on the treatment side, but we're already seeing the momentum on the assessment and on the testing side. And we expect that to continue, Tim. And some of that is partially why we were forward leaning on our view for what the rest of this year looked like earlier this year with you guys.

Okay. Yes, that's very clear. I guess as my follow-up, I was staying on this topic, but I was hoping you might be able to offer a bit of insight on the, I guess, into your portfolio of PFAS remediation solutions that you have on hand, because I know your regenerable resins technology gets a lot of attention, right? But I also know you have an entire suite of solutions. So I'm curious how much do you expect to play on the drinking water side versus those higher contaminated industrial DoD sites, airports, et cetera?

Yes. So I mean if you go back to our portfolio of services, we have experts, regulatory experts, PhDs, toxicologists, helping a lot of our clients thinking about -- think about how to model this, how to think about risk, how to think about exposure and liability and how to treat. We have dedicated PFAS labs that are really well equipped to address, Tim, not only the drinking water testing and the testing of other water matrices, but also on the air side. As you think about what happens after PFAS is removed, right? If you're going to incinerate it, for example, you need to validate that you're actually destroying these molecules. And so our testing footprint is really starting to see some momentum, not just with water, but across various environmental media, air, water and soil. And then you're exactly right. On the treatment side, because we're now looking at parts per trillion thresholds across 6 molecules, some of which are more challenging to remove. Certainly, our anchor regenerable resins are seeing a lot more activity, including now a little bit on the drinking water side, that remains not an area of focus for us. Our foam fractionation is seeing a lot of uptick on the landfill leachate side, which we're really encouraged to see. And then our teams are seeing some really nice inbounds, given our technology for the replacement of AFFF foams, which impacts a whole different constituency. And the reason I bring that to your attention is, obviously, the drinking water limits are there. The municipal drinking water treatment needs to begin and will begin. But all of the sources of upstream contamination are now, right, in everyone's crosshairs because they're partially the reason some of these levels are elevated within the drinking water. And so it's all interconnected. It's really hard to look at this in isolation. But our suite of services is upstream of a lot of these, and we're getting pulled downstream into the drinking water market because of some of the life cycle cost advantages that our technology offers. Does that answer your question, Tim?

It does, yes. So it sounds like you do have technologies that can address the drinking water systems. So that's not your main focus. But regardless, these MCLs are going to have adjacent impacts or upstream impacts that go beyond drinking water systems, and that is going to affect your business in a material way. Is that a good summary?

Yes. It already is, and that's exactly right. Yes.

Your next question is from Jim Ricchiuti from Needham & Company.

I apologize if there's going to be some background noise. But I wanted to -- 2 questions. First, we didn't have a chance to really talk a whole lot about the revision to the guidance that we raised to your full year guidance earlier. Maybe if you could just spend a moment or two on what really drove that? I mean it sounds like you're seeing a better performance from Matrix. But I'm not sure if that's really having as much of an impact as it is other parts of the business.

Yes. Let me take that, Jim. Just philosophically, we have learned since our IPO in 2020 that we're best served being as transparent as we can with you at the broader investment community so that there's no surprises quarter in, quarter out. And the reason we were more forthcoming, not just when we increased guidance, but if you go back to our February annual 2023 readout and the first time we provided guidance for '24, we gave a lot more color on what the quarters look like. And the reason for that is there's a few dynamics in the business that are not only topical but very relevant to the financial outcome. The first is the regulatory landscape has shifted materially through the course of Q1 and even now in the early part of Q2, Jim. And as a result, the implications for us and what the back half of the year looks like and what the organic trajectory looks like is real, it's material. And that has changed kind of our optimism, not just for this year, but as we look out through the course of the next few years. And so that's one variable that moved from when we initially provided guidance and certainly has moved since we talked with you through the end of last year and early part of this year. The other dynamic that we are weighing and it's certainly going to continue to be a theme. We have to articulate as we think about quarterly performance, not annual, is the impact of Matrix. So you're exactly right. That's a business that is very different in terms of its revenue and EBITDA weighting first half of the year versus second half of the year. And as a result, we wanted to give you guys more color on that. And then the third dynamic is the impact both of recent acquisitions and the transition away from the large train derailment emergency response last year. So that's because there were so many compounding variables, we wanted to make sure we were very open about what's driving the business. But fundamentally, the increase in guidance was because the structural underpinnings of the business look really solid for us, and we're really optimistic about what the next couple of quarters, next couple of years looks like. Does that make sense?

It does, Vijay. That's helpful. And just a final follow-up question for me. You're talking about a growing funnel M&A. Obviously, there was the additional capital that you've added back in April. And maybe if you could, 2 things. Historically, you guys have done more smaller deals than a few bigger ones. But I'm just wondering if -- how we should think about M&A activity and whether you guys have to add some additional resources, or if you feel you have the infrastructure in place to accommodate a pickup in M&A?

We are comfortable with our resources that we have in place now, Jim, to accomplish what we've set up for this year. And you're exactly right. If you go back -- if you think about our historical cadence of around $10 million-ish of EBITDA and our target of businesses that are a couple of million dollars of EBITDA each that we're purchasing at very attractive multiples. That would suggest, right, just round numbers, call it a handful, [ 5 million-ish ] deals a year. And if you look over the last couple of years, we've done more sizable ones like a Matrix, but the cadence has been a little smaller. It's a little lighter because we've been a little bit more cautious with capital allocation. What we're finding now is that the pipeline never went away and the backlog is quite robust in terms of the opportunity set for us. And you can see that already, right, Jim, through the first quarter, we've -- or call it, first 4 months. We've already closed 3 transactions, and there's more on the common. So as a result, the cadence is higher. So we wanted to make sure not only is the balance sheet going to be able to absorb that because these are very strategic and very attractive transactions for our long-term growth plans, but that our team is able to do it, too. So there's nothing large that's imminent. There's no changes to our strategy. There's no additional resources needed. This is more of the same, except the cadence is higher than it's been in the past.

Your next question is from Brian Butler from Stifel.

Just you kind of touched on the M&A question, the last M&A question, but maybe a little bit more color on what you're looking for service-wise across the segments, and just kind of help understand where those opportunities might lie.

Yes, Brian, we -- our -- if you step back and think about where our transaction ideas or leads come from, these are word of mouth either from our clients or from our teams. And so it's largely either geographic expansion or the addition of specific service lines that our teams believe will be complementary to what they're already offering to our clients. And so using the 3 from this year, Epic was a continuation of what we already do, a fantastic team, just an expansion geographically. Two Dot was exactly the same. It was a geographic expansion of our current service line. And then ETA is a small transaction. It was a partner of Montrose's serving existing clients and so that we just brought that in-house. And so this is -- that is geographic expansion, I would say, is by and large, the primary driver, existing services, no shift to strategy, just bolstering our ability to serve our clients in different places. The second thing we look for -- and look, table stakes is cultural fit, right, and financial accretion. So let's put that to the side. The other variable that we look at, though, to a lesser extent, is an expansion of our technical capability or the acquisition of selected technologies that has not really been the cause for any of the recent transactions, but that is another area where we tend to be focused.

Okay. That's helpful. And then maybe we could just talk on PFAS revenues, where we are right now and the outlook with the $200 million -- $200 billion total addressable market is huge. But where are we starting? And again, you kind of talked about the ramp already, but just a little color on the starting point.

Yes. So PFAS it ebbs and flows a little bit, Brian, based on kind of the projects. But to put it in context, it was, call it, $15 million to $20-ish million of revenue as we approached our IPO, around IPO and it's called [ $75 million to $100 million ] today. And so we've seen a really nice growth trajectory over the last couple of years, and we think that, that will be multiples of its size that it is now over the next several years.

Okay. And maybe just one last one...

Going back to the earlier -- and sorry, Brian, going back to the earlier point that we were making with Tim, this is not just a treatment consideration for us. It impacts all parts of our business in all 3 segments.

Okay. Great. And then just one last one. I was just going to ask on the R&R business. ex-Matrix, do you have a comparison where you -- on the EBITDA margin? I mean, was that margin up if you took Matrix out of the mix? Or was there still some headwinds from the biogas?

Margins would have been down just slightly, Brian. And you're exactly right. It's the pivot in biogas. You'll see that start to ramp really nicely, particularly in the back half of the year. Margins in that segment will be up really nicely for the full year, largely driven by the back half. Yes, Brian, just stepping back, and this is why we keep really anchoring in on the quarters not being as meaningful as the full year comparison. Just to put all this in perspective, if you look at the midpoint of guidance, it assumes an approximately 100 basis point, 1% increase in aggregate EBITDA margins. Obviously, our advisory business, we think margins will be steady in the mid-20s on the testing side, right, that's a mature business, 18% to 20%, they'll be steady. And so really, that margin accretion you're going to see coming from both increased operating leverage and a really nice margin accretion on the Remediation and Reuse segment. So we got to watch this over time, right? The individual quarters will be -- will swing based on acquisitions and other variables.

[Operator Instructions] Your next question is from Stephanie Yee from JPMorgan.

I was wondering if you can talk about what you think your normal cadence for. I know it's hard, but just a sense of what organic revenue growth cadence should be for the next few years. I know historically, you talked about something like mid-single digit to high single-digit that people can expect in any particular year. I'm wondering with kind of the regulations, especially on the PFAS side, whether we should be thinking about high single digits to low double digits being the normal -- new normal for Montrose going forward?

Yes. Why don't I take that? And then Allan should certainly jump in, Stephanie. We -- just to remind everyone, the way we define organic growth is we exclude the impact of acquisitions entirely, and we also exclude the impact of our emergency response business. So you got to look at kind of the core performance to really understand what the organic growth trajectory of the business looks like. When we went public, you're exactly right, Stephanie, we talked about being at approximately 7% to 9% organic growth cadence. And if we look -- obviously, there's been some intra-year variability. But as we look past, today, looking back to IPO, we've been growing closer to 15% a year on average organically. And if you look at our guidance for this year, we are implying a 10% to 12% organic growth for 2024. And so obviously, if you just take those numbers and contrast that with the 7% to 9%, our signal for the near future is that we are at an elevated organic cadence relative to our recent past. As the business grows, as we -- obviously, as revenue continues to accrete at 30-plus percent a year as it has been, we -- maintaining those levels, right, on a dollar basis is more challenging. And so we're not changing our outlook, but we do believe that we're going to be this year at an elevated organic cadence. And certainly, the tailwinds, the secular tailwinds in the industry are real, and they're going to continue to impact us positively, we believe, into the foreseeable future.

Okay. That makes sense. That's super helpful. And I was wondering if you can talk more about what you're doing in your biogas business, now that you've anniversaried the pivot. Just what kind of projects are you working on now? And I think you mentioned that you do expect to see growth in the back half of the year, but just any additional color on what's going on with that business.

Yes, the pivot is complete. And so the quarter-on-quarter noise will certainly be there because the pivot was really finished in Q3 of last year. So it's all done. It's behind us. As we look '23 versus '24, you're going to see really nice revenue and margin growth in that business, we believe, and that will manifest itself as part of the aggregated ECT2 footprint, which is a combination, obviously, primarily of biogas and our PFAS water treatment business.

And the biogas, it's not so much different projects, Stephanie, it's the components of the projects that we're servicing that is different, right? So focusing on the higher-margin design, engineering, installation as opposed to some of the [ oversight ] of construction and equipment procurement.

There are no further questions at this time. I will now hand the call back to Vijay Manthripragada for the closing remarks.

Thank you very much again for all of you for sharing your time with us this morning. We're really excited about what the prospects look like for us, and we look forward to our Q2 update in the near future. Take care, everyone.

Thank you. Ladies and gentlemen, the conference has now ended. Thank you all for joining. You may all disconnect.